One such false start occurred in 2010 when a previous Commerce Minister, Simon Power, said, when discussing the then new legislation "I am confident that various other standards will ensure that mum and dad investors can make informed decisions about whether to use a particular financial advisor and will ensure that advisors act in their best interests".
That didn't work out so well so the question before the panel today is "will this time be different?"
To preface the following discussion the chances aren't good. What's more the stakes are much higher today for three reasons:
• Because interest rates are lower and stock market valuations are higher future long-term returns will be much lower than in the past. However fees are largely unchanged so their impact has never been higher.
• The difference in costs between products that institutional investors like the Super Fund or ACC deem worth buying versus the KiwiSaver market is greater than at any time in the past.
• We have the prospect of a low cost, government-owned KiwiSaver fund being made available to retail investors soon but if financial advisors choose to ignore it the benefits of the fund will be denied to many New Zealanders.
So will the new legislation require advisors to put clients' interests first and for example consider switching existing KiwiSavers to the low cost government fund?
The key test is what exactly does the requirement to put clients' interests first (PCIF) mean?
To the average New Zealander putting clients' interests first would mean their advisor picking the best products for them.
As this columnist has argued for many years it's pretty clear what the best products are.
Given the portfolios of institutional investors like the Super Fund and ACC the best products almost always are the lowest cost products.
Academics and practitioners agree: Debbie Harrison of the Pensions Institute at the Cass Business School was quoted in the London Financial Times as saying "there is little academic evidence to support the argument that asset management and the potential for outperformance is more important than cost".
The chief executive of the California State Teachers Retirement Fund said recently "the best way to get better returns is to reduce costs".
However the NZ regulator, the FMA which reports to Faafoi, has a different view of what putting clients' interests first means.
Despite Faafoi's rhetoric about "even playing fields" the FMA is on record as saying that there is not a level playing field when it determines if an advisor is PCIF.
The FMA has publicly said that, although financial advisers are required to put their client's interests first, what that means for a sales person at a bank that directs its employees to only sell its own limited range of higher cost products is much less rigorous than for an adviser who works for a firm which is able to choose from a wide range of products.
FMA chief executive, Rob Everett, was quoted on the Good Returns website as saying "it means different things for different people in different circumstances. What it means for an AFA holding themselves out as a non-aligned individual is different to someone offering [a bank's products] for example".
One could, charitably, describe this position as an "its ok to sell high cost products if that's all you have got" regime.
It thus seems that all clients' interests will be put first but, borrowing from George Orwell's Animal Farm, "some clients interests will be put less first than others".
So in respect of the new legislation will Faafoi opt for a reasonable definition of PCIF or will he continue with the present charade?
It's pretty clear what he should do – the highest cost growth KiwiSaver scheme has annual fees of at least 2.88 per cent pa, more than 5 times that of the new government KiwiSaver scheme and almost 29 times that of a low-cost passive fund. The SEC website estimates that every 1 per cent in annual fees reduces a retirement nest-egg by 19 per cent over a 20-year timeframe. Incidentally this is the sort of information the FMA should have on their website instead of bland statements like fees are important.
Faafoi should ensure that the new legislation compels all advisors to genuinely put clients' interests first and end the current charade of saying that they do when clearly they do not.
Alternatively Faafoi could tell the truth and admit that the government is okay with a regime whereby very few advisors, especially those who work for vertically integrated institutions who recommend their own high cost products, don't put clients' interests first.
Neither of those options look likely but there is another alternative which would be less painful for the industry.
The next best option would be to introduce a fee cap on each class of KiwiSaver – for example 50 basis points on growth KiwiSaver funds.
This would mean that whilst KiwiSavers interests still aren't put first the extent to which they are put second would be limited.
That is the next best way of getting KiwiSavers interests prioritised and would give them a better chance of optimising their retirement saving outcomes. With $42.3b in KiwiSaver and many New Zealanders unlikely to have enough money in retirement it is too important to allow the current unfair status quo to continue.
Brent Sheather is an Authorised Financial Adviser and a personal finance and investments writer.
